ANZ
Banking Group’s decision to shift its focus back to its core Australia and New Zealand franchises is necessary in order to avoid its Asia business damaging shareholder returns, bank analysts say.

They welcomed comments by ANZ chief financial officer and head of strategy, Shayne Elliot, who last week said the bank would “shift gears" by allocating more capital to Australia and New Zealand, rather than Asia.

Citigroup said the domestic strategy should include a renewed focus on small business banking where deposit gathering is important.

ANZ has slipped to become the fourth-largest and least-popular bank with its customers in this area.

While ANZ remains committed to its target of generating 25 to 30 per cent of group profits outside of Australia and New Zealand by 2017 and has not abandoned its much publicised Asia strategy, the lower returns – and higher capital requirements – for the Asian business have diluted the group’s overall returns.

The return on equity for the Asia Pacific Europe America (APEA) division is about 11 per cent, compared with 15.6 per cent for the group.

Citigroup analysts said ANZ had a business mix problem, with higher costs and falling net interest margins in Asia. “ANZ must redirect focus and investment on its domestic businesses in addition to pursuing further cost efficiency opportunities in Asia Pacific Europe America," analysts Craig Williams and Wes Nason wrote in a note to clients. Citigroup calculates that the APEA division reduces group return on equity (ROE) by about 0.40 of a percentage point and this would rise to about 1.30 percentage points by 2017 if ANZ reaches its goal of earning up to 30 per cent of group profits outside of Australia and New Zealand.

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ANZ’s group underlying ROE of 15.6 per cent compares with Commonwealth Bank of Australia’s cash ROE of 18.1 per cent, Westpac Banking Corp’s 15.5 per cent and National Australia Bank’s 14.2 per cent.

Competition in Asia for institutional and corporate clients, which are ANZ’s main targets in the region, is intense as US and European banks step up after initially withdrawing in the aftermath of the global financial crisis. Their re-entry is squeezing margins.

ANZ’s significant investment in Asia also puts upward pressure on the bank’s cost-to-income ratio, a key metric that all banks are trying to lower.

Mr Elliott said in Hong Kong last week that the Asia business was making decent returns and growing well. “You get to a point where you have a business with its own momentum and now they have to focus on getting better returns in that business," he said.

ANZ’s share price has risen about 3 per cent since the comments appeared in The Australian Financial Review on Friday. The APEA division, which is overwhelmingly made up of Asia businesses, is delivering 16 per cent of group earnings, compared with 8 per cent in 2007.

ANZ has risen to be ranked fourth by Greenwich in corporate banking in Asia. Chief executive
Mike Smith
remains committed to growing in Asia over the long term, believing growth in the Australian market will be constrained by low credit demand and a lack of local acquisition options.

Mr Johnson, who has long warned that ANZ’s Asia strategy was “overhyped", said the regulatory capital intensity of ANZ’s minority investments in Asian banks will rise sharply under Basel III, when the stakes are 100 per cent deducted from tier 1 capital, up from a 50 per cent deduction. ANZ is looking less favourably upon some its partnership stakes due to the strict capital regulations and will consider divesting some shares in the future.